By Daniel Rosen<p>
Daniel Rosen is partner and
co-founder of the Rhodium Group, an advisory company, and an adjunct professor
at Columbia University’s Graduate School of International and Public Affairs.
</p>

February 7, 2014

As the U.S.-China relationship grows more complex and important, one Chinese commentator stands out for provocative ideas undiluted by caveats or diplomatic hedging: the U.S.-educated, Shanghai-born venture capitalist Eric X. Li. Over the past several years, he’s built a significant audience. Affiliated with the Aspen Institute and the Berggruen Institute on Governance, he delivered a TED Talk in June 2013 entitled "A Tale of Two Political Systems," and wrote widely discussed articles for Foreign Affairsand the New York Times. Li’s most recent offering, a Feb. 4 Huffington Post article entitled "The Middle Kingdom and the Coming World Disorder," recycles some of his favorite themes: He enumerates the defects of a U.S.-centric international system that he perceives to be crumbling, praises the deftness and strength he sees in China’s statecraft, and predicts a coming period of international volatility as China displaces the United States. By circulating his ideas so widely, his articles provide an excellent opportunity for debate and discussion.

And this is good, because most of Li’s ideas are dangerously wrong. In his latest article, Li argues that in its maritime neighborhood China has already accomplished its goal of changing the status quo without military conflict. He believes China has accomplished this by making its naval presence a de facto reality across the disputed area in the South and East China Seas– where several Southeast Asian nations and Japan also have claims — ending an era of intentional ambiguity about Beijing’s position.

But to claim that China has achieved this after just a few years of pushing the boundaries is like saying that the United States’ Vietnam policy was a success — in the early days of the Vietnam War. Many of China’s neighbors are stepping up their militarization as a result of anxieties over China’s posture. In 2013, Japan flew hundreds of sorties over the Diaoyu, the disputed islands in the East China Sea which Japan administers and calls the Senkakus, in an effort to demonstrate its ongoing capacity to keep them under its umbrella. Many security analysts believe an unfortunate mishap between rival forces is increasingly likely, if not inevitable.Li is calling a victory for Beijing, well before the game is over. At minimum, Li must recognize that whereas China’s neighbors were mostly quiescent toward China’s rise a decade ago, many are now contemplating a response to reduce what they see as Chinese overreaching.

Li’s view of economics resembles his view of international relations. Simply put, Li believes China has won because it has bent the rules to its advantage, pumping up its own economy to the detriment of others.In his Huffington Post essay, Li writes that China "negotiated its way into the WTO (World Trade Organization) on preferential terms." On one level, this is a simple error. The nation applying to the WTO makes all the concessions in such negotiations, not the incumbents, who decide which exceptions to normal treatment they insist on imposing.

But Li’s error is important because it speaks to a serious misconception: that China’s successful WTO negotiation allowed it to keep its capital account closed, thereby insulating the country’s financial infrastructure from the recent financial crisis. Indeed, finance was one of several sectors that China, like other WTO countries, protected from international competition. But Li neglects that the 2008 financial crisis in fact had a profound impact on China, despite the country’s capital controls, with vast amounts of hot money flowing across its borders. Beijing cannot, as Li suggests, quarantine itself from monetary pressures while fully trading with the world. Moreover, by keeping foreign financial competition limited, China created even more serious problems by isolating its domestic financial entities. No developed economy would trade its financial sector problems for China’s today, especially because to sustain its partly-insulatedmodel Beijing has had to live with weak domestic capital markets. China’s stock markets and other exchanges have essentially destroyed wealth ever since their reestablishment in the early 1990s, because cordoning them off from international competition and populating them with politically-connected issuers has made it impossible for them to mature. Li’s industry — private equity — is a hot ticket in China precisely because those public equity markets are moribund.

Li commends Beijing for free-riding on U.S. security rather than sharing the burden. "Who can blame them?" he asks. But China is rapidly ramping up its power projection expenditures: It will spend $148 billion on its military in 2014, one third higher than 2009 and more than any country in the world except the United States, according to IHS Jane’s, a consultancy which tracks defense spending.

Contrary to what Li writes, Beijing has little choice but to make up for the time it lost free-riding on the security contributions of others, because for the first time in its history China is extremely dependent on foreign raw materials. Over 50 percent of China’s iron ore, oil, edible oils and potash fertilizers must be floated across the oceans to satisfy the country’s needs. China’s leaders now see a world full of Chinese travelers, money, and interests that the country has little ability to protect in times of trouble. (Beijing learned this the hard way in trying to extract roughly 36,000 of its citizens as Muammar al-Gaddafi’s Libya collapsed in 2011.) Li says China sits naturally in this new world order, while maintaining an ancient policy of keeping out foreign troubles, not stepping into them. But that luxury ended in 1993 when China became a net importer of oil.

Yes, Li plays a valuable role by giving voice to Chinese pride in the Middle Kingdom’s economic, diplomatic and geostrategic achievements. But his fellow private equity professionals know that an investor always "talks his book" — that is, reads the facts in a way that flatters the investments he has chosen to make. As Chinese pundits reach out to a wider western audience, it’s important to listen to them — but also to think carefully about their blind spots.

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John Garnaut<p>
John Garnaut is China correspondent for the
Sydney Morning Herald and the Age. He is writing a book on the princelings
shaping China's future.
</p>
<p>
Photo: Hu Yaobang (white coat), with Hu Jintao and Wen Jiabao
to the right, during a February 1986 inspection tour to Guizhou.
</p>
| Dispatch |

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Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and a senior editor at The National Interest. Prior to Fletcher, he taught at the University of Chicago and the University of Colorado at Boulder. Drezner has received fellowships from the German Marshall Fund of the United States, the Council on Foreign Relations, and Harvard University. He has previously held positions with Civic Education Project, the RAND Corporation, and the Treasury Department.

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Bethany Allen-EbrahimianBethany Allen-Ebrahimian is a Tea Leaf Nation Fellow at Foreign Policy. She spent four years in China before joining Foreign Policy, and holds a masters degree in East Asian studies from Yale University. | Tea Leaf Nation |